Foreign exchange (currency or forex or FX) market exists wherever one currency is traded for another. It is by far the largest financial market in the world. Currency pair - Currencies are traded against one another. Each pair of currencies thus constitutes an individual product and is traditionally noted XXX/YYY, meaning the price of one unit of XXX (called the base currency) expressed in terms of YYY (called the secondary currency). For instance, EUR/USD is the price of the euro expressed in US dollars, as in 1 euro = 1.3045 dollar. Out of convention, the first currency in the pair, the base currency, was the stronger currency at the creation of the pair. Spot price or spot rate of a currency is the price that is quoted for immediate (spot) settlement (payment and delivery). Spot settlement is normally one or two business days from trade date. Buy – when you buy the primary currency you sell the secondary currency. When the price goes up you gain, and when it goes down you lose. For example, when you buy the EURUSD, you buy the euro and you sell the dollar. Sell – when you sell the primary currency you buy the secondary currency. When the price goes up you lose, and when it goes down you gain. For example, when you buy the EURUSD, you sell the euro and you buy the dollar. Spread is the difference between the price available for an immediate sale (bid) and for an immediate buy (ask). For example: The exchange rate between the South African rand and the United States dollar might be 6.50 rand to the dollar. A person looking to convert rand into dollars might have to pay 6.55 rand for each dollar, while a person looking to convert dollars to rand might receive only 6.45 rand for each dollar he converts. It is usually written as USD\ZAR 6.45\6.55, or simply 6.45\55. Rollovers / Premium - On the AvaTrader platform, all open positions are automatically rolled or swapped to the next business day on 22:00 GMT. A premium is then either added or subtracted based on the interest rate differential between the two currencies being traded. You can see the overnight premiums on the instruments window, in the Prem. Buy $ / Prem. Sell $ columns. Balance & Equity – Balance represents the cash you have in your account, while equity represents the current value of your account. For example: you deposited $10,000 and opened a position EURUSD that gains $800. Your balance is still $10,000, and your equity is $10,800. Once you close your position both your balance and equity will be $10,800. Leverage – Most retail forex market makers permit 100:1 leverage but also, crucially, require you to have a certain amount of money in your account to protect against a critical loss point. For example, if a $100,000 position is held in EURUSD on 100:1 leverage, the trader has to put up $1,000 to control the position. However, in the event of a declining value of your positions, most forex brokers will close out your position when your margin goes below the 1%, essentially requiring you to always keep much more than the 1%. At Ava we dont close out your position until the margin is 90% depleted – in our example $100. Margin is the amount of money that must be maintained in order to support the open positions in an account. If there are not enough funds in the account, a margin call will be issued. Margin Call – When the margin posted in the margin account is below the minimum margin requirement, the broker or exchange issues a margin call. The investor now either has to increase the margin that he has deposited, or he can close out his position. He can do this by selling the open positions if he is long and by buying them back if he is short. PIP A percentage in point (pip) = 0.0001 (or 0.01 in Japanese Yen) is the smallest measure of price move used in forex trading. For instance, if the currency pair EUR/USD is currently trading at 1.3000 and then the exchange rate changes to 1.3010, the pair did a 10 pips move. The pip is the smallest measure regardless of the fractional representation of the currency exchange rate. Thus, 1.3000 to 1.3010 is the same move in pips terms as 110.00 to 110.10. Pips are sometimes called points. Interest is compensation to the lender for foregoing other useful investments that could have been made with the loaned money. Instead of the lender using the assets directly, they are advanced to the borrower. The borrower then enjoys the benefit of the use of the assets ahead of the effort required to obtain them, while the lender enjoys the benefit of the fee paid by the borrower for the privilege.
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